Momentum Financial Planner Katlego Gaborone discusses the dangers of debt and how to avoid falling in the trap - as well as dig your way out.
They say that there are two constants in life: death and taxes. Yet, aside from the 1% of the population, there are actually three constants we need to grapple with; death, taxes…and debt. If you want a roof over your head, and wheels under your feet, you are likely paying off your house and your car through monthly instalments through a financial institution of some kind.
Debt is a universal burden and a necessity to this modern life, but it is also a danger and an extremely slippery slope that can quickly hurl you and your family off a financial cliff. Did you know that South Africa has over 26 million active credit users? Even worse, 10 million of those spenders are behind on their payments and not in good standing according to the Credit Bureau Monitor.
However, the Momentum Unisa 2020 Consumer Financial Vulnerability Insights report recently noted a slight improvement in consumer financial vulnerability levels, but despite this, consumers still remain exposed.
Given the fragile economy with record high levels of unemployment, the best thing we can do is avoid the trappings of debt. It starts with understanding your financial goals.
Don’t let your goals be tolls
Financial success can be achieved on two levels: the journey towards a financial goal and the destination - when the specific goal is reached. In simple terms, for households and individuals to know whether they are financially successful or not, they must have financial goals. Some set these goals consciously, and others do it on a subconscious level. All the same, financial goals should exist for all households and individuals.
For too many people, the trappings of debt are often lifestyle related. Do you need that specific car? Do you not have enough clothes? Could you live in a small home until you reach your goals? If you want to upgrade your lifestyle, perhaps start by making that one of your financial goals, structuring your goals to help move you from where you are now to where you want to be. Start by making a list of wants versus needs and always prioritise the needs.
Don’t be afraid to get in touch with a certified financial adviser to help point you in the right direction based on your own personal circumstances.
Consolidate your debt
One method of getting a handle on your rampant debt is to take out what is known as a debt consolidation loan. This is where you take out a single loan to pay for numerous others. This has two advantages; the monthly instalment is often less than all the smaller debt repayments combined, and the interest rate charged is often lower.
It is also convenient to pay one loan account that covers all debt. Now more than ever, banks are willing to help clients with debt consolidation, because the credit crisis is seriously causing the one thing banks absolutely want to avoid – defaults on payments. Plus it will help improve your credit score for any future (but necessary) debt you may need to incur.
Debt free is the only way to be
Although there are some debts you simply cannot outrun such as home loans and car repayments, you should be aiming towards a life with no debt where you are living within the means of your monthly income. This may seem impossible to achieve but it should always remain a financial priority. The last year has taught us that financial crisis, be it personal, national, or global, can come out of nowhere, so you should aim to be ready for whatever comes your way. Debt should never be an obstacle on your journey to success.
This article is an extension of a money show hosted by Deputy CEO at financial services company Momentum, Jeanette Marais.